"Underwater" homeowners face ethical dilemma

ORLANDO, Fla. (RNS) Lynn Thompson quit paying the mortgage on her investment property—not because she couldn’t afford the payments, but because she thinks walking away is better for her long-term financial health.

Thompson bought the property here for $175,000 in January 2007, just as the housing market began its slow downward slide. At the time, she planned to rent the house and eventually sell it for a profit.

Today, she estimates the house is worth $85,000, maybe less.

Unable to find renters to help cover the mortgage, she tried to convince her lender to allow a “short sale”—selling below the loan amount, with the lender forgiving the balance. When the lender declined, Thompson decided to walk away.

“I would have basically no money left every month if I made the payments,” said Thompson, a single 39-year-old pharmacist. “If I tried to sell the house in, say, 10 years from now, I still would have to come up probably with, say, $75,000.”

Desperate homeowners like Thompson have raised an ethical debate: Is it ever OK to walk away?

Nationwide, up to 25 million homeowners—about one in four—are “underwater”: like Thompson, their mortgages are worth more than their homes. Those who do walk away face an array of financial consequences, from damaged credit to the prospect of a lender suing to recover the balance. Yet for many, the question fundamentally is a moral one. Is it the right thing to do?

It’s unclear how many homeowners, like Thompson, are opting for strategic defaults—allowing their homes to go into foreclosure even when they can make the payments. Many feel their homes are decades away from regaining value and they see no other options.

But especially in hard-hit places such as greater Orlando, where 55 percent of homeowners are underwater, the question is nagging at more homeowners, and the number of strategic defaults appears to be rising.

Strategic defaults accounted for 31 percent of all defaults in March, up from 22 percent the year before, according to an April report by Paola Sapienza of Northwestern University and Luigi Zingales of the University of Chicago.